Level 1 CFA® Exam:
Credit Quality of Debt Investments
Credit risk is the risk of incurring a loss as a result of the issuer not being able to make full and timely payments of interest and/or principal.
Credit analysis is the evaluation of credit risk.
The issue credit rating (aka. CCR = corporate credit rating) doesn’t have to be exactly the same as the issuer credit rating (aka. CFR = corporate family rating). The issuer credit rating usually applies to the issuer’s senior unsecured debt, whereas the issue credit rating depends on the terms like the priority of payments, etc. for a given issue.
When doing the credit analysis focus on:
- adverse events that might occur and impact the company,
- cash flows rather than income,
- operating cash flows because they stem from the company’s operations.
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- Credit risk is the risk of incurring a loss as a result of the issuer not being able to make full and timely payments of interest and/or principal.
- Credit analysis is the evaluation of credit risk.
- When doing the credit analysis focus on operating cash flows rather than income.
- Z-score by Altman is used for predicting bankruptcy. The score lower than 1.81 indicates possible failure.